GST would have an impact on the cost of construction, working capital, margin, contracts with vendors and customers. Another important GST impact on real estate would be the opportunity to review the pricing strategy and move to a pricing strategy which is not based on indirect tax considerations. Thus, GST would impact every aspect of the real estate business.

Seamless flow of credits: In GST regime all the above duties/taxes (except stamp duty) will get subsumed, therefore a builder should be able to avail the input tax credit of all its procurement of goods/ services except for few restrictions placed in the Model law. Therefore, it would reduce the tax costs substantially in the construction industry. Under GST, it is expected that seamless credit of all taxes paid on procurement of goods/ services will be allowed so that net outflow of GST liability would be minimised.

Broadened Tax base: Many construction contracts which are exempted in the current regime (especially the government contracts) could be brought under the tax net in the GST regime. Therefore, if any long term contract is entered in the current tax regime now but if GST is implemented, then the same would be taxable under the strictures of the GST law, therefore, It is important to factor the GST impact while arriving at the price of the contract and the burden of the taxes must be clearly reflected in the contract to avoid any complications at a later date.

Joint Development Agreements: GST will also be levied on the Joint development agreements as Barter also amounts to ‘Supply’. The comparative flat value may have to be taken for calculating GST on such transactions. A clear mechanism as to the time of supply and valuation has not been explicitly provided in the revised Model GST Law.

Treatment of the Land Component: Since stamp duty is being paid, it is expected that the land component would be allowed as a deduction in the valuation of real-estate transactions in the GST. However, the issues w.r.t the valuation of land to be adopted and claimed as deduction could continue to be a cause of the dispute. Even in the revised model law, no clarity has been brought in as to the valuation of the land. However, it is expected that the same must be clarified by way of issuing a notification during the GST regime.

No Requirement of completion certificate: Similar to provisions in service tax, GST is said to be levied if the amount is received prior to completion certificate and there would be no GST if the entire amount is received after the completion certificate. Further, it is also stated that even if completion certificate is not received, GST may not be levied after the first occupancy of the premises. This would provide relief to builders who for various reasons were unable to obtain the completion certificate from the authorities and as a consequence was denied the exemption from service tax.

Treatment in case of SEZ: It is explicitly stated that same will be on par with the exports and therefore such supplies will be treated as a ‘Zero-Rated Supplies’ therefore no GST needs to be charged for the supply of goods or services to the Special Economic Zones.

Treatment in case of EOU: There is no clarity in the model GST law as to continuity of the exemptions in respect of EOU’s.

GST on Stock Transfers: Since, transfer of inputs/ capital equipment from one site to another is quite common in real estate sector. Therefore, builders operating from multiple locations in different states would be required to pay GST on stock/ Assets transfers from its premises in one state to its premises in another state. Further, in a case of the builder are having multiple business verticals within the state and if a builder opts to take separate registration for each such business vertical, then GST needs to be paid for stock transfers even when a stock transfer is made within the same state.

Multiple Registrations: Concept of centralized registration for all the projects will end and builders having a site in multiple States would require obtaining separate registration in each State from where the construction activity/ supplies are being undertaken even though the project is for a very small period or for a small value. Although, this scenario is inexistent in the current law for the state taxes but the same will now be done even for the central taxes.

Anti-Profiteering Measures: Since a builder will be able to take the credit of goods lying in stock, the tax cost would decrease. This additional benefit accruing to the builders is expected to be passed on to the end consumer by way of reduction in prices etc. A separate authority will be formed in the GST regime to monitor the non-compliance of the anti-profiteering matters which could have an adverse impact on the entire construction industry whose pricing is more market dependent than other factors. Therefore, it is imperative for the builders to establish passing of the GST benefit to its consumers. In these times of falling prices, this may not be a challenge, though.

Working Capital – Time of Supply in GST: Currently, many builders pay taxes on receipt basis (without complying with the point of taxation) in the case of service tax i.e. tax is paid only once the monies are received from the customers. However, in the GST regime, tax needs to be paid immediately on earliest of completion of service, raising of invoice or receipt of monies from customers. This could have an impact and could cause blockage of working capital.

Classification issues: It seems that certain disputes in classification may arise in the GST regime if a separate rate of tax is maintained for the construction and other additional services provided by the builders such as floor rise premium, car parking etc. Based on the terms of the contract and the nature of the supply, it needs to be determined whether it is a ‘composite supply’ or a ‘mixed supply’ and accordingly rate of tax for the additional services needs to be determined. Therefore, if the construction agreements are not in line with the naturally bundled understanding then any differential rate if applicable could be a cause of concern.

Valuation complexities: Valuation of the services would be of the transaction value. However, valuation with the related parties/ between the group companies needs to be properly dealt with and must be kept at the arms length price to avoid unnecessary departmental intrusion.

IT Infrastructure: In GST regime, businesses have to move from the manual environment to computerised environment. Only an efficient IT infrastructure and its best usage can help businesses meet the high compliance needs of the GST. If IT infrastructure is not optimally utilised, then it would be challenging for any business including real-estate sector to function efficiently in the GST regime. Further, in the computerised environment, physical interaction with the department officials would reduce substantially. ERP must be customised to make it capable of meeting needs of the business as well as comply with GST.

Complexities

When GST is made applicable current under construction projects will be at different stages of construction and developers would have already paid service tax and VAT for procurement of goods and services for which they will not get input credit. Hence cost reduction will be lesser than 20% for current under construction project.

Model GST law clearly mentions input credit will not be available for goods and services purchased for execution of work contracts. We have seen two different interpretations by courts of whether construction of residential complex is a work contract or not. If it is treated as a work contract cost of developer will not reduce at all after GST implementation.

Input tax credit is not allowed if composition scheme (i.e., abatements for the cost of land and goods) is used by developers for calculating service tax and VAT.

Existing Scenario

Taxes applicable in a residential real estate transaction.

Service Tax – If you are purchasing an under-construction property, developer will have to charge you service tax and deposit it with the central government. This tax was not applicable till 1st July 2010. The key reason for the same was contracting between builder and buyer for a construction of residential unit was disputed as works contract as it also includes the value of land. Hence rules regarding taxes on work contract were not applicable on residential complex construction. In finance act 2010, the government added an explanation to the definition of construction of residential complex and made it deemed service. For the simplicity sake government has given an abatement of 3/4th of the cost of a unit as land and goods for construction and only 1/4th of the cost of a unit is treated as service. Hence presently most homebuyers are paying 3.75% of the cost of a unit as service tax (1/4th of 15%). Recently service tax on under construction property has again been put under question as Delhi High Court ruled against this and matter is sub-judice at Supreme Court of India.

VAT (Value Added Tax) – If you are purchasing an under-construction property, you will have to pay additional VAT in some states such as Karnataka, Haryana and Maharashtra. Developers charge this value added tax and deposit it with state government. VAT has also been under dispute for a long time and still there are many states such as UP who do not charge VAT. Also unlike service tax, there is no uniform way of computing VAT across states. E.g. in Maharashtra under composition scheme VAT is charged as 1% of agreement value whereas in Haryana the same proposal was passed but not yet agreed by developers. In Karnataka VAT is charged at 5% of agreement value of a unit. To calculate an accurate value of VAT and not use composition scheme, developers will have to maintain proper accounts of goods purchased for construction and VAT paid by them for the same to get input credits which are cumbersome and makes it tough for buyers to understand.

Stamp Duty – Stamp duty is charged by a state government, again at varying rates, for registration of sale agreement for real estate transactions.

Words from Experts

The enactment of GST law will single-handedly solve many of the challenges faced by the real estate sector and help in pulling the sector out of its long slumber Parveen Jain, President, National Real Estate Development Council

It will be important to see what the final rate of GST would be because if the rate is higher than the existing cumulative taxes, it will certainly be a dampener as it will increase the final cost of buying an under-construction flat and defeat the purpose of the bill. Neha Hiranandani, Director, House of Hiranandani